Londonomics: Splitting Headache

Ugh, splitting the bill. At worst it’s like showing your parents around the touristy bits of town — expensive, unfun, leaving everyone involved with the feeling that they’ve been shafted. Inevitably someone skips the starter; someone else orders two sides; somebody's off the sauce; puddings either divide opinion or are themselves divided by two or more diners.

Simple game theory points to one way to sort this out. Before the meal, everyone should agree to split the bill evenly. That way, everyone will be encouraged to maximise their orders; competition will level things out.

Unfortunately, but perhaps predictably, economists have discovered that this approach tends to increase negative externalities. Or to put it in English, people get selfish and greedy. Taking turns – one person picks up the tab each time – will only tend to exacerbate the effect.

How about a little creative market regulation then? After an initial glance at the menu, everyone throws in as much money as they think they’re going to spend. After the meal, any shortfall is made up by the party as a whole.

Alas, this strategy is thwarted by the ‘free rider’ – and don’t we all know one of those? One person who sees a chance to underbid, and sticks the rest of us with the excess.

Oh, and the simplest and fairest method – everyone just pays for exactly what they consume? Well, after a few glasses of wine, after toting up dishes that tend to end in .50 or .95 – without the aid of the menu – we then have to calculate 17.5 per cent VAT and venture into highly contentious territory of tipping, which is a whole other post (or perhaps a whole other blog).